US embassy cable - 05CARACAS1808

UNCLAS SECTION 01 OF 02 CARACAS 001808 
 
SIPDIS 
 
SENSITIVE 
 
NSC FOR TSHANNON AND CBARTON 
ENERGY FOR ALOCKWOOD AND DPUMPHREY 
 
E.O. 12958: N/A 
TAGS: EINV, EPET, VE 
SUBJECT: U.S. INDEPENDENT OIL COMPANY IN FIGHT FOR SURVIVAL 
 
REF: CARACAS 1721 
 
1. (U) The following message is Sensitive but Unclassified. 
It contains company confidential information and should be 
handled accordingly. 
 
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SUMMARY 
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2. (SBU) A senior executive of U.S. independent Harvest 
Natural Resources, Inc. says his company is in a fight for 
its survival.  Harvest, the holder of an 80 percent share of 
an Operating Service Agreement (OSA) contract signed in the 
first round of Venezuela's 1990's oil sector liberalization, 
has lost 50 percent of the value of its stock since December 
2004 when the GOV started its active campaign to force 
migration of the OSA contracts to mixed companies/joint 
ventures under the terms of the 2001 Hydrocarbons Law.  While 
Harvest continues its efforts to negotiate with the GOV, the 
company is also preparing, if necessary, to file an 
application for international arbitration with ICSID and will 
look for USG support for its claim.  End summary. 
 
3. (U) On June 9 econoff met with James Edmiston, Executive 
Vice President and Chief Operating Officer of Harvest Natural 
Resources, Inc.  Harvest (formerly Benton Oil and Gas) has an 
80 percent share of Harvest Vinccler, a company that operates 
three small oil fields in southern Monagas state under an 
Operating Service Agreement (OSA) contract signed in the 
First Round of Venezuela's 1990's oil sector liberalization 
(the "apertura"). 
 
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BACKGROUND 
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4. (SBU) Since late 2004, the GOV has taken a number of steps 
to force the oil companies holding OSA contracts signed in 
three bid rounds in the 1990's into negotiations to convert 
their assets to mixed companies/joint ventures (with majority 
GOV ownership) under the terms of the 2001 Hydrocarbons Law. 
The first step in this process was a late 2004 decision by 
the GOV to limit the capital expenditure budgets of many of 
the OSA companies as well as to refuse to approve drilling 
permits.  Harvest ) 100 percent of whose income is generated 
by its Venezuelan assets - was particularly affected by these 
moves.  Harvest's production has also been curtailed by PDVSA 
at levels below its current production capacity and more than 
10,000 b/d below its proposed 2005 Work Plan.  As a publicly 
traded U.S. company, Harvest has made several public 
announcements about its situation, i.e, such as that it had 
been forced to release two drilling rigs because of its 
failure to receive the necessary permits, which has angered 
GOV officials.  According to Edmiston, Harvest has lost 50 
percent of the value of its stock since December 2004. 
 
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GOV VALUATION METHODOLOGY 
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5. (SBU) As reported reftel, the GOV has recently taken 
additional steps to force the companies into negotiations, 
the first step of which is the valuation of the existing 
contract assets.  Edmiston informed econoff bluntly that the 
value of Harvest's OSA contract is "dying on the vine." 
Edmiston met June 8 with an official of the Corporacion 
Venezolana de Petroleo (CVP, the PDVSA affiliate that manages 
relations with international oil companies) and, based on 
that conversation, told econoff it was clear the GOV plans to 
value the contract based on the result of the confiscatory 
policies imposed in past months, i.e., such as applying a 50 
percent vice 34 percent income tax rate to decrease the value 
of the future income stream, etc.  Edmiston noted that 100 
percent of the free cash flow of the business so far has gone 
to the GOV. 
 
6. (SBU) If the GOV does adapt such tactics, said Edmiston, 
the two parties will never come to an agreement.  He, 
therefore, proposed to the CVP that the two partners "act 
like partners" in looking at a number of fallow oil fields 
near Harvest's current operations.  Edmiston proposed that 
Harvest would incorporate them into a new business plan with 
a development plan that would meet GOV objectives.  If that 
presented a compelling business opportunity said Edmiston, 
the two parties could then discuss the migration of the 
original OSA contract.  Such an approach, Edmiston argued to 
the CVP, would not require either party to prejudice his 
position.  Harvest also made this proposal in its response to 
a PDVSA letter dated June 2 which delivered the GOV's 
proposed "Transition Agreement" (see reftel). 
 
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READY TO TAKE LEGAL ACTION 
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7. (SBU) While Harvest continues its efforts to negotiate 
with the GOV, the company is also preparing, if necessary, to 
take legal action.  Early in 2005, Harvest changed the legal 
home of the Harvest Vinccler holding company to Curacao so 
that the company could avail itself of the European Union's 
bilateral investment treaty with Venezuela in the event it 
needed to take legal action.  Edmiston informed econoff that 
the company is preparing to file an application for 
international arbitration with the International Center for 
Settlement of Investment Disputes (ICSID).  (Note:  Harvest 
would be looking to take advantage not only of the EU's BIT 
with Venezuela but possibly also provisions in the company's 
OSA contract.) Edmiston asked econoff if the USG would be 
prepared to support him and said that company representatives 
would soon be calling on Washington officials. 
 
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COMMENT 
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8. (SBU) It is particularly ironic that Harvest has been a 
first target of the GOV as Harvest tried to be the first 
company to negotiate an agreement under the Hydrocarbons Law. 
 On October 17, 2003, Harvest Vinccler signed a Memorandum of 
Understanding with PDVSA to study 
the feasibility of developing two fields located close to its 
current operations.  The company anticipated that negotiation 
of an agreement on those fields would have been accompanied 
by re-negotiation of the original OSA.  Since then, Harvest 
has made a number of other proposals to the GOV, none of 
which have gone anywhere.  Whatever the merits of its legal 
case, we expect the GOV will look for further ways to punish 
Harvest if it seeks arbitration. 
Brownfield